Managing Your Money and managing your risks are the two most important skills any trader can master
Most people know the elements of good trading are: cut your losses -
Rules of Efficient Trading
- Cut your losses
- Set intelligent stop losses
- Let your profits run
- Never let a big winner become a loser
- Never average down a loser
- Do not overtrade
- Never use a market order before the opening bell
- Use market orders to capture the price movement in a trending market
- Use limit orders to capture the spread in a trading range market
- Never chase a stock
- Try to minimize commissions -
- Choose the right broker.
As humans, we have two conflicting emotions that sometimes dictate our actions - hope and fear. We always hope our stocks will go up but we fear losses. To be successful, you have to display a cold, calculating, mean, ruthless, take-no prisoners efficiency to cutting losses and letting profits run.
Just as most traders stay too long in a trade, some also want to choke off their profits by exiting trades too early. Give your capital the best opportunity to grow. To be a good trader - you have to cut your losses and let your profits run. You can be wrong more than half the time and still make very good money trading.
If this has ever happened to you, you know it is a very discomforting feeling. If your stock went up by 7 points and you did not set your stop loss intelligently, the next day the stock falls by 9 points - you will feel like Uncle Furdy.
5. Never Average Down A Loss
Averaging down a loss means that you buy more shares of the stock when it goes down as a means of lowering your breakeven price of the stock. Averaging down a loss is a big sucker bet. If the stock is going against you - get out, there are better places to put your money where you will get stronger returns.
There are many times when the market conditions warrant sitting tight. If the market is choppy, with no clear trend, when the news on the macroeconomic front is sending mixed signals, or when the Fed is about to meet to ponder its latest move on interest rates, sitting on the sidelines can be the most brilliant strategy of all.
7. Use Market Orders to capture Price Movement in a Trending Market
If the market is moving or trending up fast you want to use market orders to capture the price movement. During my early years of trading, I wanted to buy DELL for $32. That day Dell opened at $32.5 and I wanted to capture the market spread so I decided to get in at the bid which was $32.5, so I placed a limit order at the bid of $32.5. Within a few minutes, the stock jumped to $32.75 - and my order did not get filled. I cancelled the first order and placed another limit order at the new bid of $32.75. Again, however, before my limit order could get filled the bid jumped another ½ point.
The problem with limit orders is that they may not get filled - the stock you thought was going up may do so and you may not be on board. If your indicators tell you that a sector or stock is trending up - use market orders instead of limit orders.
8. Use Limit Orders to Capture the Spread in a Sideways Market
Limit orders make more sense in a market that is trading sideways. You can wait for as long as you want - if you want to go long (short) just sit on the bid (ask). There is a good probability that you will get what you want.
9. Never Use a Market Order Before the Opening Bell
The clear and present danger in placing a market order before the opening bell is that the stock will as they say "gap and crap". That is, the stock will shoot up at the opening bell under heavy pressure from accumulated market orders, then after that pressure is released, the stock will fall back down.
10. Choose the Right Broker - Read the Fine Print
Some discount brokerages that offer cut-rate commissions, or none at all, may be quietly picking investors' pockets, by sending their orders to the market maker who will pay them the biggest fee for doing so. That may be good for the discount broker, but not so good for the investor, who may lose out by not getting the best price on a trade. --Barron's--
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